FINANCIAL ACCOUNTING II PBAC 301 ACCOUNTING FOR SHARES AND DEBENTURES LECTURERS: DR. JOHN MACCARTHY MR. LEXIS TETTEH

LECTURE ONE: SHARES Overview: What is a share? Merits and demerits of shares What are the classes of shares Methods of issuing shares Stages in the issue of shares Accounting entries for the issue of shares Redemption of redeemable preference shares

What is a share? What is a share? It is a unit of ownership that represents an equal proportion of a company’s capital. Share certificate provides evidence of ownership in a company. It is an ownership right acquired in a company which may be transferable. Share is issued by a company at par value or no par value.

What is a share? (cont.) Par value share is a share that has a face value, that is, its issue price is written on it. No par value share is a share that has no face value. That is the issue price is not stated on it. In Ghana, shares are issued at no par value. This means that future disposal of shares cannot be done at discount or premium.

What is a share? (cont.) No Par Value: Shares offered to the public do not have any fixed value. The prices of the shares are determined during the time of sale to the public. These types of shares are called “Shares of No Par Value” or simply No Par Value Shares. With no par value shares, there are no accounts for share premium or discounts on shares.

Merits and Demerits of Shares Merits of Issuing Shares (Shareholders): High returns: Shareholders are entitled to the entire profits of the company. Control: The company belongs to the shareholders and can exercise their right by voting at the AGM. Demerits of Issuing Shares (Shareholders) Fluctuations: There is fluctuations in share price and dividend payments unlike that of debenture holders. Dilutions of controls: There is dilution of controls when additional shares are issued.

Merits and Demerits of Shares (cont.) Merits of Issuing Shares (Company): Permanent source of capital (i.e., equity shares are long term capital it not easy to be redeemed). No fixed return (i.e., company does not need worry about payment of return). No need to used assets as guarantee to capital as debenture). Increase in company’s creditworthiness. Demerits of Issuing Shares (Company) Managers or the company has to explain issues to the Ownership and may vote on some of the issues.

What is a share? (cont.) Classification of Shares: The law allows for the creation of different classes of shares with certain rights regarding dividend, voting, repayment or otherwise. Generally, there are two main classes of share Preference shares Ordinary /equity or common shares Note that American refers to shares as Stock

Classification of Shares Preference shares These are shares that are entitled to a fixed and specified rate of dividend. These are shares that are entitled to a capital redistribution before ordinary shareholder when the company is winding up (liquidation). Preference shareholders do not have voting right. Dividend payable on preference shares may be either cumulative or non cumulative.

Classification of Shares (cont.) Cumulative preference shares are entitled to dividend in arrears in period where no dividends are declared and paid. Non cumulative preference shares are not entitled to dividend arrears. Preference shareholder can enforce their rights only if there is profit and the directors decide to distribute them by way of dividend. Ordinary dividend cannot be paid until preference dividend is paid, either current or cumulative dividend. All preference shares are deemed to be cumulative unless otherwise indicated.

Classification of Shares (cont.) Ordinary shares These are also known as equity shares or common shares. These are shares which entitled the holders to the residue of profit or assets after the dividend or capital of preference shareholders has been determined. Ordinary shareholders have the right to vote on any resolution placed before the company. They are not entitled to a fixed rates of dividends and usually bear the risk of the company.

Classification of Shares (cont.) Legal considerations: All shares should be issued and paid for, in consideration paid for or payable to the company, except they are bonus shares. Pay-up shares should only be done in in cash unless otherwise stated and agreed. Pay-up shares are the total number authorized by the regulations and issued and paid for at any time in any consideration that has been determined by the company. Shares issued may be paid for by the shareholders according to the company’s regulation.

Legal considerations The Registrar of companies should be informed in writing within 28 days after allotment of shares and the terms of the agreement. A company must deliver a share certificate to the registered holder within 2 months after issue (currently electronic certificate is available). Stated share capital: This is the total consideration (cash or kind) received in respect of shares issued and paid for. It may also include transfers from income surplus of the company.

Legal considerations (cont.) Treasury shares These are portion of shares that a company keeps within its own treasury. This has come from a repurchase or buyback shareholders. This can also be company’s shares that have never been issued to the public in the first place. these are shares which have been lawfully redeemed, re-purchased or acquired or forfeited and are in the company’s custody prior to their re-issue.

Legal considerations (cont.) Notes that the consideration received in respect of re-issue of treasury shares is not part of the stated capital. Issue share capital is the consideration received for shares issued and paid for to date. This may be lower or equal to stated share capital. Stated share capital is also termed the authorized share capital is dependent on whether issue shares are fully paid for else the values are different.

Methods of Issuing Shares There are different methods of issuing shares: Public issue (prospectus): This is where prospectus is advertized in the media inviting the public to subscribe to the shares of the company. Offer for sale Here the company sells all the shares to an issuing house, usually a financial institution which in turn sells them to the public at profit.

Methods of Issuing Shares Public Placement A stockbroker is contracted to find persons or financial institutions who would buy the shares. He reward is called brokerage Underwriting This processes involved with the provision of advice on the issue, buying and reselling the new issue from issuing company to the public. Methods of Issuing Shares The underwriter makes profits from the spread (i.e., the difference between the buy and sell of the shares). In some case, the underwriter or syndicate enters into fixed commitment and deals with the issue on “Best effort or all-or-none basis”.

Methods of issuing shares (cont.) Right Issue Existing company may wish to raise additional capital by offering the existing shareholders an additional shares to subscribe to on pro-rata basis. The price of issue is usually lower than the existing market price. The shareholder has the option to take up the offer, sell the right or renounce it. Bonus issue or capitalization issue. Existing shareholders are offered additional shares in the company without payment of cash. The consideration involves transfer surplus to stated capital.

Stages of Issues The following stages may the involved Application invited and received with the agreed consideration. Applications considered and unsuccessful ones rejected and monies refunded. Allotment is made to successful applicants and monies received accordingly. First call and subsequent calls (per the agreement) made and monies received. Shares of defaulting shareholders forfeited and share retired to treasury. Treasury share re-issue and monies sent to share deals.

Accounting for share Issue Note that the price of the share may be paid: full upon application or In installment at application, allotment through to the calls. Accounting issues are uncomplicated when full payment is required on application. The issue of forfeiture will not apply. In this case we debit bank account and credit stated capital with the amount. Where installment basis is applied then the stages will be followed through and through.

Share Redemption The Law frowns on indiscriminate redemption of shares by companies. Why? When can a company redeem or repurchase it own shares: It creates credit balance on the share deal account. Transfer is made from reserves to share deal for that purpose. Fresh issues or new shares are made purposely for the redemption.

Reasons for redemption (cont.) To buy out troublesome shareholders To reduce the dividend bill of the company Take out the company from public market To enjoy the market prospect of the shares Employment-based share offering may be redeemed when employee resigns.

Accounting entries Three scenarios exist: Redemption is made through Share deal account Redemption from fresh issue of shares Combination of share deal and fresh issue

Accounting entries- Share deal Enough monies on share deal Dr. Share deal accounts Cr. Bank account No enough money on share deal but income surplus exist Dr. income surplus Cr. Share deals with top required Dr. share deal account Cr. Bank with amount of redemption. *

Accounting entries- Share deal similar entries are required where no money is in share deal account but here you transfer full amount needed from income surplus to share deal *Note that preference share capital will remain on the balance sheet as treasury share (but no voting /dividend right)

Accounting entries: Combined Share deal account + income surplus top up + fresh issue Dr. income surplus Cr. Share deal with amount transferred from IS Dr. Bank Cr. Share deal with amount redeemed from share deal account Dr bank Cr. Stated capital with the fresh issue Dr. Stated capital (preference share) Cr. Bank with amount redeemed from fresh issue

Practise Question 1 Tasty Meals Ltd issued a prospectus on January 21, 2016 for 10,000 ordinary shares of no par value at Ghc500 each. The shares are payable as follows: March 1: Ghc100 is payable on application invited (i.e., sent to prospective investors) March 4: Ghc200 is payable on allotment March 12: Ghc150 is payable on 1st Call March 25 Ghc50 is payable on 2nd Call The issue was fully subscribed and all monies were duly received as they became due. Required to: Prepare Bank account and stated capital account as at 31st December 2016.

Practise Question 2 Redemption of Excess Application (Refund) Wakye Limited issued an invitation to the public to subscribe for 80,000 ordinary shares of no par value at Ghc10 a share and is payable on application. Applications have been received for 120,000 shares on January 15. On July 4, the company allotted shares to successful applicants and refunded the excess money. Required to: Account in the books of Wakye Limited, the correct entries to be recorded in bank account and stated capital account.